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Panel Urges Relaxing Rules For Oversight
Report Seeks Shift to 'Principles' To Ease a Financial Burden; Protection for Auditors, Directors
By Greg Ip, Kara Scannell and Deborah Solomon
The Wall Street Journal
Thursday, November 30, 2006

A blue-ribbon committee on financial regulation has called for better protection of auditors, company employees and outside directors from authorities and lawsuits, as well as less-detailed rule-making and lower-key investigations.

The Committee on Capital Markets Regulation's report, to be released publicly today, is one of the most high-profile efforts to date to address concerns that excessive regulation -- much of it a response to recent corporate scandals -- is adding to corporate costs, stifling the public securities markets and causing the U.S. markets to lose business to foreign competitors.

"The United States is losing its leading competitive position," the 148-page report says. One reason is "the growth of U.S. regulatory compliance costs and liability risk."

The committee is directed by Harvard law professor Hal Scott and co-chaired by former White House adviser Glenn Hubbard, now dean of Columbia University's business school, and John Thornton, former president at Goldman Sachs Group Inc. and now chairman of the Brookings Institution. The group's recommendations for the most part either parallel efforts already under way or would require a different implementation of existing laws, primarily by the Securities and Exchange Commission. Only a few would require new legislation.

Treasury Secretary Henry Paulson is likely to welcome the report; the former chief executive of Goldman Sachs already is advocating many of its recommendations and recently called for a broad re-examination of regulations and laws.

He will hear more opinions before long. Early next year, the U.S. Chamber of Commerce is expected to release its own report, and Sen. Charles Schumer, (D., N.Y.), along with New York City Mayor Michael Bloomberg, have hired McKinsey & Co. to assess market competitiveness and its impact on the city's economy. Early next year, Treasury will host a conference to discuss the regulatory, legal and accounting structure.

The group would like the President's Working Group, a coordinating group headed by Mr. Paulson and including the heads of the SEC, Federal Reserve and Commodity Futures Trading Commission, to use its report to recommend specific reforms. That would give the issue "national economic significance," said Mr. Scott.

But Mr. Paulson will also have to decide which ideas are politically viable and which are dead-on-arrival. "Obviously anything you need congressional approval for would be difficult," said Mr. Scott, such as auditor-liability caps and reduced state-federal enforcement overlap.

Mr. Hubbard said, "I'm not sure this is as horrible a political [environment] as people think. There are Democratic leaders who have been quite bold in this area," citing, for example, incoming Senate Banking Committee Chairman Christopher Dodd's (D., Conn.) role in limiting shareholder class-action lawsuits in the 1990s.

The report makes 32 recommendations, of which six relate to easing the application of Section 404 of the 2002 Sarbanes-Oxley Act governing internal company-financial controls. The SEC already plans to present new guidance on section 404 on Dec. 13. Companies have complained that the section is expensive and onerous to implement.

Other recommendations call for setting a higher bar for regulators or private litigants to go after outside auditors, independent directors and company employees, especially when they act in good faith. It also recommends Congress cap auditors' liabilities, as some European countries do.

It recommends lawyers who donate to the officials who run public pension funds be barred from representing those funds in a class-action securities lawsuit. This could be done by the Department of Labor passing a rule under pension laws, or separate legislation.

The report's overarching theme is a change in regulatory philosophy. The revised philosophy is one based more on general principles than prescriptive rules, more aware of costs as well as benefits of new rules and less intrusive. It lauds Britain's Financial Services Authority, which uses "principles"-based regulation and oversees all British financial firms, in comparison with the U.S.'s multiple federal and state banking and securities regulators.

It suggests the SEC act more like federal banking regulators, such as the Federal Reserve, which concentrate on the soundness of the financial system and less on individual acts of wrongdoing, "with less publicity surrounding enforcement actions." That would encourage securities firms to step forward when they find problems, it says.

The report also says the U.S. has fallen behind some other countries in protecting shareholders' rights. It recommends that companies be required to submit "poison pills," meant to deter hostile takeovers, to shareholder approval.

It also says companies should require directors to be elected by a majority of voting shareholders.

On the contentious issue of executive compensation, it advises no action.

The SEC, it says, should create a special staff group to measure costs and benefits of rules before they are implemented.

Write to Greg Ip at, Kara Scannell at and Deborah Solomon at